How Accounts Receivable Automation Reduces DSO

Cash flow is paramount to the success of any organization.

Sixty-eight percent of financial professionals surveyed by the Association for Financial Professionals say that managing cash flow and liquidity is a top priority for their organization.  Additionally, 53 percent of financial professionals identified reducing DSO as a significant concern for their company’s financial health.

In these uncertain economic times, managing cash flow is paramount to an organization’s survival.  Slow customer payments can strain a biller’s cash flow, resulting in costly borrowing, delayed capital projects, missed growth opportunities, and increased risk of the biller defaulting on its obligations.

Accelerating Day’s Sales Outstanding (DSO) – a critical indicator of a company’s liquidity and operational efficiency – is one way to ensure an organization has the cash it needs.  A high DSO implies longer cash conversion cycles, using up valuable resources and restricting liquidity.  Accounts receivable (AR) automation – digitizing and simplifying invoice presentment, payment processing, cash application, and reconciliation – can play a big role in helping organizations of all sizes reduce DSO and improve financial flexibility and stability.  This article shows you how.

What is DSO and why is it important?

Cash flow is more important than ever in uncertain economic times like these. 

That’s why AR leaders closely watch DSO, a measure of the average number of days it takes an organization to collect payment after a sale has been made.  The higher an organization’s DSO, the longer it takes for the organization to collect its cash.  DSO is calculated by dividing your AR balance by net credit sales and then multiplying the result by the number of days in the period being measured.  

DSO is a powerful tool for assessing a company’s liquidity, financial health, and efficiency.

  • Working capital.  Converting sales into cash more quickly can reduce the need for financing and enable growth.
  • Credit management.  Rising DSO may indicate that a company is extending credit to customers who are slow to pay.  Left unchecked, slow payments can lead to bad debt. 
  • Customer communications.  Closely monitoring DSO can shine a light on customers who the AR team should consider following up with to ensure timely payments.
  • Operations performance.  DSO can provide insights into an organization’s AR efficiency.

Speeding cash flow, and reducing risk result in reduced DSO, and a stronger organizational financial standing.

How traditional AR processes increase DSO

There is no question that slow payments can increase DSO.  Manual and semi-automated approaches to generating and presenting invoices, facilitating customer payments, processing remittances, and reconciling electronic deposits can further exacerbate the DSO impact of slow payments.

  • Invoice presentment.  It takes a lot of time to manually prepare and print customer invoices and for invoices to wind their way through the postal service to a customer’s accounts payable (AP) department.  Worse, invoices can become lost in transit or can be misplaced by customers.  The longer it takes for a customer to receive an invoice, the longer it takes for a biller to receive payment.    
  • Customer payment options.  Offering limited payment options can delay the receipt of cash while customers find alternatives to their preferred payment method.    
  • Cash application.  Few finance tasks are as time consuming as manually matching payments and remittance, keying remittance data, and posting payments to open invoices in an ERP. 
  • Reconciliation.  Manual and semi-automated processes make it hard to know the status of customer payments, identify overdue invoices, and prioritize receivables for collection.  Traditional AR processes may also involve time consuming, back-and-forth calls to follow up on unpaid invoices.  

How AR automation accelerates DSO

  1. Electronic invoice delivery.   In an automated environment, billers can automatically load invoices into an online portal for customer review and payment.  Billers can then track the progress of their invoices from delivery to approval and payment in real-time.  Customers can also upload electronic copies of invoices they receive directly, easily select, and pay the electronic invoices using a variety of methods, and research past invoices.  There is less chance of invoices becoming lost or misfiled, and delivering invoices faster helps to reduce the time it takes to convert sales into cash.  
  2. Multiple payment options.  Automated AR solutions enable billers to offer customers flexible payment options. Customers can use a secure hosted webpage to make an ACH or credit card payment, or customers can review a batch of pending payments for accuracy and fund the payments with the touch of a button.  Funds are then deposited directly into the biller’s bank account and billers can instantly track the status of customer payments.  Making it easier for customers to pay with multiple payment options can reduce the possibility of delayed or late payments and improves the overall customer payment experience resulting in satisfied customers who are more likely to initiate payments promptly, and reduce DSO.
  3. Remittance details.  Automated AR solutions provide billers with the full remittance details they need to apply payments to open invoices faster and more accurately.  Reducing posting delays and unapplied cash frees up working capital that a biller can use to grow its business.
  4. Reconciliation.  Automated AR solutions reconcile electronic customer payments deposited in your organization’s bank account in real-time, regardless of whether they were made via ACH or card.  Streamlined reconciliation enables billers to improve the reliability of their financial reporting and increase working capital availability.

Reduce your DSO

Reducing DSO is a cornerstone of financial resilience for organizations of all sizes.  Traditional approaches to delivering invoices, processing customer payments, applying payments to open invoices, and reconciling transactions can impede DSO and exacerbate the impact of slow customer payments.  By automating the AR process, organizations can reduce their DSO to optimize cash flow, enhance liquidity, and strengthen their financial standing, no matter the economic climate. 

Learn how Paymerang’s Receivables Automation helps your finance team reduce DSO by scheduling a demo of the platform here.

Mark Brousseau

Mark Brousseau

Over the past 29 years, Mark Brousseau has established himself as a thought leader on accounts payable, accounts receivable, payments, and document automation. A popular speaker at industry conferences and on webinars and podcasts, Brousseau advises prominent end-users and solutions and services providers on how to use automation to improve document- and payments-driven business processes. Brousseau has chaired numerous educational conferences and has served on several industry committees and boards. He resides in Center City Philadelphia with his wife and three sons.